How does CFD trading work – Complete guide

If you know anything about CFD trading, you probably know that this is one of the most popular. And that is because of several reasons, including:

Higher leverage than other trading options. The leverage in the CFD market starts from 2% and can skyrocket up to 20%, depending on the broker and the market you activate on.

You get global market access. Not all CFD brokers offer that advantage, but most do. Which says a lot.

There are no short selling rules, because the underlying asset has no owner. As a result, there are no borrowing or shorting costs you need to be concerned about.

Many trading options to choose from, including stocks, treasury, commodity or indexes, to name a few.

Almost no fees. The majority of CFD brokers don’t charge any kind of fees for entering or exiting a trade. That is because the broker already makes money from you, the trader, paying the spread.

These are just a few of the benefits. Now, if you look at the current trend in the trading market, you will see a lot of amateurs and professional traders alike taking on CFDs now more than ever. Does this mean that they are, in essence, easier to deal with? The answer is: yes and no. Here is what I mean by that.

The most important CFD trading steps

How does a CFD work? – This is just first of the many questions you will need a detailed answer for. The next one will definitely be – How to place a CFD trade? I wish the answer was simple, but it’s not.

I have said this many times – The most important thing in the trading business is to resort to 3 simple steps:

Accumulate as much knowledge as you can

Develop strong and tested strategies to plan your approaches

Remain in control at all times

These 3 steps alone are enough to transform you into a successful trader on the long run, which is what everybody wants. But there is a difference between wanting and actually doing. In this regard, I have a few strategies for you, in case you aim high and want to know how to walk into a pro’s shoes.

1. The PPC strategy (Preserve Precious Capital)

I have two words for you: capital management. What this means is that your focus should shift from winning to not losing. Keeping your losses at a minimum will eventually impact your wins and that will show in your bank account. Don’t take unnecessary risks, especially when you are still in the accommodation phases, when emotions are stronger than mathematical reasoning.

2. Keep the leverage at minimum

Write this rule down on a piece of paper if you have to. But whatever you do, don’t lose sight of your CFD leverage. I am saying this because it is a double edge sword. The leverage is awesome when working to your advantage and devastating when the fortune Gods stop smiling at you.

It is not uncommon for professional CFD traders to gain small fortunes in the market, just to turn them back as soon as they lose control. This doesn’t mean the leverage is unreliable, it only means that, especially as a beginner, your goal should be to keep it at a minimum. Then, as you get more acquainted with how the market moves and get all accustomed with all the intricacies of the CFD trading, you can raise it a bit. But never enough to lose your profits.

3. Set realistic expectations

Going big right from the get-go is where all cocky traders die. This goes hand in hand with the PPC strategy and it basically says you need to focus on down-to-earth goals. Even more important, you need to set ones that are easy to achieve over shorter periods of time.

Aside from providing you with small, steady gains, it will work wonders on your state of mind and confidence. Just make sure you are in full control of your investments and don’t get taken away with the wave.

4. Put a rock-solid trading plan together

Having a good, tested trading plan is what will ultimately decide how to trade CFDs effectively and with as fewer losses as possible. In this sense, you need to focus on:

– Getting the right entry strategy – This can only be achieved by testing a lot of entry set-ups, to know what works and what doesn’t. There are plenty of back-testing software to use in that regard.
– Managing your finances accordingly – Knowing how much to spare for each trade in particular is a key aspect of the CFD trading. I agree, the concept is a bit volatile, because the “eye-money” is something you will develop with time. So, you better start as soon as possible.
– Lowering the risks – Pretty self-explanatory if you ask me. Just know when and where to stop a trade or when it isn’t even worth it to start one in the first place.
– Knowing how to use Stop Loss – As simple as it gets. All you need to do is know when to apply the Stop Loss strategy when going in profit.

– Keeping a journal – Information like: the instrument you used in trading, the time the trade was entered or exited, the profits and the losses, your trading options related to the market’s movements, what rules you followed or what mistakes you made and what can you learn from the actions is what you definitely need to write down. It is the key to self-improvement.

5. Remain consistent at all times

This is probably one of the most important CFD trading steps. Nothing pays off more than being consistent in your trading activity. This means being aware of the ups and downs of the market and know when to take your advantages and when to cut your losses, always be disciplined and stick to your trading plan at all costs and maintain a positive mindset no matter what.

Consistency is what makes a winner, there is no question about it.

How to trade CFDs like a pro

Once the main strategies are in place, knowing how to place a CFD trade comes down to following precise and, more or less, standard steps. However, I am primarily interested in efficiency more than anything else, which means these following steps are crucial in terms of becoming a pro fast. Here is what I mean by that:

1. Choose your CFD contract

How to do that? Pretty easy. If you are a beginner, simply choose one it is easier to find information on. Or one you can end up mastering faster. It is even easier as a pro, because all you have to do is to stick with what has proven to be reliable.

2. Check all the necessary details

This includes specifying the margin and the leverage (needless to say, you need to take it slow), choosing the direction you see the assets moving to, along with anything that will eventually define your trading profile.

3. Keep your position under strict surveillance and close

Monitor how the market moves and remain in full control of your trade. The moment you see your profit hitting decent limits or sense that you might reach the margin close out, take actions to seal the deal and either secure your profit or cut your losses.

Three basic steps with efficient results, as long as you stick to the plan.

Are you ready for it?

Everybody who puts efforts into self-development is ready for CFD trading. All you need is a strong basis and some situational awareness. Remember, we have all been rookies at one point.
I have been a rookie at one point. And I have made a lot of mistakes and lost a lot of money so you don’t have to. But I have an excuse: there weren’t too many trading guides to rely on.

How does CFD trading work? How to trade CFDs? - The complete answer to these questions can be found in this comprehensive guide. Learn everything that there is to know about CFD trading and CFD trading strategies.

Learn everything about the costs and commissions that you may incur in CFD trading and how all these affect your breakeven and profit margins. Find out what CFD brokers don't have any commissions at all.

Learn about the risks of CFD trading so that you are aware of the potential losses that you may incur in case of unsuccessful trades. Understanding these risks can greatly help you in decreasing and even preventing such losses.

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